Research suggests Twitter helps market liquidity of little-known companies.
It almost goes without saying that Twitter has changed the way corporations communicate. Despite much early sneering about the 140-character limit of a tweet, thousands of very serious companies fire off tweets daily about their latest news.
But does tweeting have any impact on investors? A new empirical study suggests that it does. In particular, Twitter seems to help little-known companies overcome the natural bias of traditional news media toward bigger companies that already get buzz.
The researchers, who include Elizabeth Blankespoor, an assistant professor of accounting at the Stanford Graduate School of Business, found that tweeting measurably increased the market liquidity of stocks that normally get little attention.
That’s important for both practical and theoretical reasons. As a practical matter, corporate investor-relations departments are pouring money into Twitter and other “push” technologies without completely knowing how well they work.
On a more theoretical level, the findings further undermine a key assumption about how markets work. The traditional assumption has been that markets instantly assimilate every new scrap of information as soon as it becomes public. If a company announces its latest earnings over thePR Newswire, for example, the traditional view is that the information reaches everybody in the market immediately.
Many analysts had already found that the real world was messier than that. In the real world, investors get much of their information from the news media — the Wall Street Journal, news services such as Bloomberg, and television networks such as CNBC. And news organizations pay much more attention to high-visibility companies because those are the ones that attract bigger audiences. Continue reading…